While the headlines portend doom and gloom in the housing market, the reality is, it might just be the right time for you to buy a home or refinance regardless of whether we see another slight decline in home prices or a flat market for years to come. After all, who’s really buying a home these days for capital appreciation? It just makes sense for people who are very confident that they will not need to move in the near-term and don’t want to keep paying a landlord’s bills for them. Assuming you qualify from both a down payment and credit standpoint, there are many mortgage options out there and it can be confusing figuring out which one is right for you. Very much depends on your personal situation, so using a calculator mortgage t provide you with options and monthly payments, you can make an informed decision.
- 30 Year Fixed – This is still the most common mortgage type in the US. What I like about the 30-year mortgage is that you allow the present value of money to work for you. You’re able to borrow money at an extremely low rate (low 4%) while inflation is around 3%, so you’re virtually borrowing money with no interest in terms of “real” dollars. The only downside is that a lot can happen in 30 years. You may eclipse into retirement or have to start paying for college for the kids, so that’s where the next one might make sense.
- 15 Year Fixed – This is another very common option, and given the shorter term, the interest rate is also lower (banks tend to view longer durations as higher risk, hence the higher interest rate. You’ll always see this in the bond market as well, except for very low probability “inverted yield curve” situations leading into a Recession). You can get a 15-year fixed for 4% or lower these days. Many people like this option because it may coincide with retirement if they’re in their 30s or 40s or college payments.
- 5/1 Adjustable Rate Mortgage – This one’s a bit risky these days in that interest rates don’t have much lower to go – but have plenty of room to rise should inflation take hold. So, you can probably get a very low rate for 5 years, but after that, the contracts are typically structured to allow up to 3 increases of 2% each once per year after the initial 5. So, if you can’t refinance into a conventional loan down the road, you may well end up with a 10% mortgage rate.
Aside from the ones listed above, there are several others, as well as combinations of the above, but these are the primary ones buyers are entering into at the present. Depending on which country you live in, there are other numerous types out there and tools to help, like this buy to let mortgages calculator for UK residents.Thankfully in the US, we’ve very much seen the demise of the “option ARM” mortgage which got so many people in trouble leading up to and during the housing collapse. With those mortgage, people were able to start off with “teaser” payments that then reset into much higher payments (with interest!) after just a few years, causing many people to just walk away from their mortgages when they realized their mortgage amount owed actually INCREASED while their home values declined, leaving them with 6 figures in negative equity.
